Japan faced a deflation problem: Amazon was blamed

Japan’s economy is expanding,but inflation is still weak, partly thanks to price competition from e-commerce companies.

The retailers from this country have been cutting prices in response to the rise of online commerce giants like Amazon.com, disrupting what had seemed like perfect conditions for Japan to get the stable dose of inflation it has long been looking for.

As a result, Japan’s central bank lowered its price forecast for the current financial year at its policy meeting today. That happened because of the need to resistance to price rises, despite Japan’s longest economic expansion in 11 years and its tightest labour market in decades.

The Bank of Japan last week revised its inflation forecast for March 2018 to 1.1 per cent from 1.4 per cent earlier. At 0.1 per cent, interest rates in the country are at a historic low, and the central bank is in the middle of a massive stimulus program to prop up the economy.

The bank is aiming for 2 per cent inflation in the future and is targeting a 2.3 per cent increase in consumer prices by 2019.

Deflation and monetary stimulus have been good for Japan’s Nikkei index, however. The benchmark has gained 135.4 per cent since 2012.

Japan is not alone in its surprise at the slow response of prices for improving economic strength. Policymakers, economists and central bankers in the US and Europe are also scratching their heads about why prices around the world can move so little while economic growth gathers momentum.

According to the latest report made by The Wall Street Journal, low prices due to intense competition between retailers – online and offline – are responsible for the Japanese economy’s deflation problems. E-commerce has less than a 6 per cent share of Japan’s overall retail sales. At growth rates of between 8 per cent and 9 per cent, e-commerce’s future prospects in the heavily digital country are considered bright. For example, according to some estimates, e-commerce sales will reach $134.1 billion by 2019. This has led traditional physical retailers to undercut e-commerce rivals in a bid to slow their growth.

Aeon, one of Japan’s largest retailers, said e-commerce has made competition more severe, especially when consumers remain budget-minded. The company, which operates Walmart-like superstores that sell food and general merchandise, cut prices on milk, shampoo and more than 250 other products in April and is planning to do so again next month.

The president of Aeon, Motoya Okada said in April that consumer trends, including the low prices offered by internet retailers, left Japan unable to return to inflation after nearly 20 years in which prices have often been in decline.

The Wall Street Journal piece quotes the president of Aeon Co., Ltd., one of Japan’s largest retailers: “The end of deflation was a great illusion,” Mr Okada said.

Aeon has made repeated price cuts to better compete with online retailers like Amazon, which offer deep discounts because they have streamlined operations. In turn, this has limited the Bank of Japan’s ability to trigger inflation in the economy through monetary and fiscal policies.

Amazon entered Japan in 2000. In 2016, Japan was the third largest market for the Seattle-based company and contributed 8 per cent to its overall revenue. The e-commerce giant’s effect on the overall economy is also a point of concern in the United States, where critics charge the company with depressing wages and making products cheaper.

The Amazon effect is not the only one factor that caused Japan’s deflation. Automation, in the form of robots in manufacturing, may have a strong case for causing deflation there as well.

According to the International Federation of Robotics, Japan is the world’s third largest market for robots, and sales in the country are expected to grow by an average of 5 per cent every year until 2019. While they have a much higher initial expense, robots are more productive compared with humans and lower overall costs associated with manufacturing products.

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